Crypto vs. Gold

I thought this analysis by Raoul Pal in a recent Real Vision interview was interesting:

And also, if you think about the set of opportunities that baby boomers had when they were in their 20s, right, they had the whole demographic wave in front of them. And they had equities by 1982. Repeat of seven in the S&P. They had interest rates at 15, 16%. So, they had the best setup in history to accumulate wealth, right? Nobody's ever been given that before. You cut to the millennial now, they've got the most expensive stock market in all history. They've got bond market that yields nothing. They've got real estate that is incredibly expensive that they can't buy. They have the absolute inverse of what the baby boomers have then. They have one thing, and that is crypto. Right. If there's one thing on a [30-year] pension retirement horizon that has the probability of going to a huge number, it's this area. That's the way I think of it. Yes, there's a whole bunch of other investments and you could do VC and stuff like that. But if there's one option bet that could pay off a thousand x, it's this. And so, if you're a millennial, you forget gold, because yeah, sure, gold may double. It may double again. But it's not going to have the same performance over time that cryptocurrency could if you get the right bets. Yeah, that's how I'm thinking of it.

You Can Be A Stock Market Genius

The subtitle is Uncover the Secret Hiding Places of Stock Market Profits and the author is Joel Greenblatt (1997).

Some years back, Harris Kupperman mentioned this book as one of his favorites on investing.  And it does focus the reader on special situations in stocks where risk/reward is more favorable – such as spinoffs, recaps, merger securities, etc.  However, given the highly automated and computerized nature of today’s markets, I question whether these strategies still work in nearly the same way, since algorithms are looking for exactly these inefficiencies (and likely do it far faster than any human mind).  Maybe when today’s lofty levels come back to earth, some of the concepts discussed will be more fertile terrain.  Or, maybe, I don’t pay attention to the stock market in the same way that I used to, so I’m not really prepared to put in the extra work to see for myself.  Regardless, his style is light and entertaining and his discussion of special situations is instructive.

Trend Changes

I revisited an interview with Harris Kupperman on Real Vision from November.  His comments on interest rates were not news (if you have been paying attention), but his delivery did a good job of succinctly clarifying the risk:

“I think the number one big-picture view right now is interest rates. If you look around the world, every currency, every yield curve, every duration component, they're all breaking out. There's a 30-year chart in the US it just broke out of. You look at shorter term charts, there are basically inverse head and shoulders everywhere. It's all breaking out.

And when you have so many different breakouts at the same time, it's probably a trend change. Interest rates go in generational cycles, 30-year cycles, and we just ended a 30-year cycle. No one in the markets right now, or almost no one, has invested during a time when rates go up. They've only seen rates go down.

I think you're going to see a huge change in what's happening in the markets. When rates go up, the value of everything else, every asset goes down because it's all value on cash flows. At the same time, cash flows go down because interest rate coverage goes up.

And I think you to see a loss situation where companies today look conservatively leveraged at 100 and 200 basis points more interest rate will actually lead to them being highly leveraged from a cash flow coverage side, that buybacks and dividends are going to end. Debt pay down is going to begin. And I think you will see a lot situations today where you have reasonably good businesses, where two, three years from now, what's to be left is an equity sliver on the enterprise value and a huge debt component…

I think it's a lot like the '70s when rates go up and values keep going down. And increasingly cash flow goes to interest service. And you're coming at this from such low interest rates that you don't need interest rates to go to 10%, 15%. To move from 0 to 300 BPS right now is an extreme. But you have interest rate floors in place, so you haven't really seen it companies.

The move from 300 to 500 BPS, that's going to go to stretch a lot of companies. And you don't really need the rates to go up that much. And yes, I think it's going to be a dramatic repricing because right now, equities price in the future, so equities are pricing in future earnings growth often funded by buybacks. And suddenly they're going to be pricing in earnings declines as everything goes to interest coverage. And when that repricing happens, it's going to be very dramatic.”

And then there's the rub...

Courtesy of Mr. Skin in Ask Fleck:

“Those geniuses can't understand why GDP "growth" has been so anemic. Too much debt for the spending class, not enough income for the "savings" class, and not enough outright welfare for all society's deadbeats. This situation is unlikely to improve.”

Political Risk v. Market Risk

Always interesting stuff from Ben Hunt (although Bill Fleckenstein probably gets indigestion from the basic conclusion):

“Unfortunately and unsurprisingly, the new political leaders who emerge from a collapse of the Tower of Babel are rarely the champions of the Forgotten Man that you might think would emerge. Both in the 1930s and today, there’s no shortage of non-status quo political entrepreneurs who speak the language of the politically stuck and are willing to put themselves out into the political arena. But to be successful in their political entrepreneurship it’s almost essential that these new candidates be card-carrying members of the 1/10th of 1% Rich Club. Why? Because it requires an insane amount of money and sheer notoriety to replace the machinery of a status quo political party in a mass society. A political party is a media company. By joining a status quo party and toeing that party line, you communicate an enormous set of signals to potential voters for free. But by toeing that party line, you lose your Forgotten Man authenticity and any hope of being the champion of Something Else. Want to be a “change candidate”? Better make a couple of billion dollars first, or have plenty of billionaire friends, so you can afford to bypass the status quo political party.”

and

“Yes, there’s enormous political risk associated with the collapse of status quo political institutions and the rise of the Trumps and the Macrons of the world. But…

1) for financial markets, these new leaders are familiar, encouraging faces. They’re members of the 1/10th of 1% Rich Club, because they had to be to sidestep status quo political parties. Moreover,

2) there’s going to be a hope and a promise of fiscal policy initiatives, and that’s a tailwind for markets, too. And finally,

3) don’t worry, Mr. Market, when that hope and promise of pro-growth policy fades into the realization of anti-growth gridlock, our old friends Janet and Mario will be there to pick up the slack with more liquidity.

That’s my macro story for the divorce of political risk from market risk, and I’m sticking to it. Where does it break down? Not with a funky German or Italian election, but with Janet and Mario declaring victory and taking away the punchbowl. That’s what will bring political risk back to markets.”

Recent Books

Hello again.  After taking a bit of break from this site, I got back to business this weekend and read a couple of books, my thoughts on which are memorialized below.

First off is Zero to One: Notes on Startups, or How to Build the Future by Peter Thiel (2014).  Truly one of the best books that I have ever read.  Admittedly, my recent experience is focused on helping to get a new business launched – but even without that backdrop, I suspect that I would still be super impressed with this one.

For those who don’t know, Mr. Thiel is the founder of both PayPal and Palantir, and an early investor in Facebook, LinkedIn, and SpaceX.  Therefore, he is not only someone with proven success in starting and funding compelling new businesses, he has been able to do it serially.  He is a risk-taker, and therefore someone worth paying attention to.

His book is less a flight path for aspiring entrepreneurs, then important base concepts that one needs to have in mind when trying to launch the next breakthrough concept.  To wit, if you are simply copying others in an attempt to achieve marginal improvements or trivial differentiating factors, you haven’t actually learned anything from the innovators and are unlikely to survive and succeed.  The moral of the story has to be figuring out the secrets that are still out there and the important truths that most others would disagree with you about.  It is not simply to be contrarian in the traditional sense of going against the crowd, but instead having the courage to think for yourself.  It is related to fighting the reality that the mainstream generally views it as progress that unorthodox ideas now are commonly dismissed out of hand.  All of that may seem obvious, but there is a certain internal fortitude required to act on these first principles.  All of this argument goes against diversification and taking risks on the truly novel and different.  That is how the money is made – subscribing to what is better known as the “Power Law”.

In addition, within his discussion, Thiel offers some interesting insights on globalization, China and monopolies.  To his thinking, globalization is simply taking what works in one place and extending it everywhere else.  In other words, copying.  Therefore, the opposite of globalization is not nationalism, but technology – that which creates new modes of progress.  So, by that logic, the strong push for globalization as the answer probably leads to stagnation – and when you consider developing concerns, whether it’s the environment or some other issue, without the new thinking that comes from innovation, we face tremendous hurdles in the future.  As an offshoot of that thinking, he views China as a growth story that is entirely premised on globalization and copying without any innovation, again an unsustainable approach that should cause greater skepticism about that country’s ability to take over as the global hegemon.  Finally, the author sees the real tension in creating new technology as between competition and monopoly.  The real innovator is the creative monopoly, which generates something entirely new with a proprietary technology that makes the world a better place.

The other book from the weekend is The World According to Star Wars by Cass Sunstein (2016).  A light read on how the Star Wars arc is a compelling metaphor for life.  It provides a story of free will, the internal battle that everyone faces between light and dark, and informs on the ideals of mercy, forgiveness and redemption.  And, most poignantly for me, it is a story about fathers and sons.  Needless to say, as soon as I finished it, I decided to give my dad, my hero, a call.

Hangover

One of the interesting data points that I came across post-election is that over the past 100 or so years, following any two-term President, there has always been an economic contraction within the first twelve months afterwards.  In that vein, I saw a really compelling interview with Lacy Hunt on Real Vision that provided the following nuggets:

As it relates to debt:
     -From 1952-1999, it took $1.70 of debt to produce $1 of GDP
     -From 2000-2015, it took $3.30 of debt to produce $1 of GDP
     -In 2016, it took $5.00 of debt to produce a $1 of GDP

That, my friends, is what non-productive investment and debt looks like.  But, there's more...

-The United States is demographically challenged.  The population is the oldest that it has been at any time in the history of the republic.

-As a post-script on those debt and GDP correlations, the last 10 years has only seen an average of 1% per capita income growth, far below historical trends.

-The post-GFC recovery has been the weakest expansion since WW2, and one of the weakest since 1790.

-The industrial capacity use rate has been trending down, which speaks to significant excess capacity.  That represents one of the strongest rebuttals to the idea that the proposed corporate cash repatriation plan will have meaningful impacts on growth.

-Of the $69Tn in outstanding debt in this country, some $20Tn is due in the next two years.  As rates are now 100bps higher than a year ago, that represents some $200Bn in additional debt service payments if all of those liabilities are simply re-financed.  In an economy where GDP only grew by $530Bn last year, more and more capital therefore has to go towards financial/non-productive overhead.

Anyway, all of it is just a roundabout way of saying that things look bleak for the economy prospectively.  And why, despite my disgust with Putin Derangement Syndrome and liberal hypocrisy, I am not a big believer in the Trump rally and related economic confidence.  Even if he does the right things, the bill is still coming due.

Oil

From Louis Gave (on Real Vision):

“2 and 1/2 years ago Xi Jinping went to Moscow and signed a 50 year deal where China was buying natural gas at a fixed price, which was like half the market from Russia, paid for in renminbi. Now when you think that, who's the marginal buyer of oil in the world? It's China. For all the talk about how Chinese growth is collapsing, et cetera, Chinese oil imports last year were up 16% year on year to new all-time highs. So China needs energy, and keeps on. The reason oil went to $150 was China's emergence. So when China does a side deal with Russia and says basically, hey, we're covered here, then if your marginal buyer disappears, then all of a sudden the cost of oil doesn't go to the price where the marginal buyer's willing to pay, it goes to the price of where the marginal producer produces it. And so it eventually went-- And now we're obviously at the marginal cost. But that marginal cost may go down again. Because now with Donald Trump, we're going to get the Keystone Pipeline. I mean, you go to Alberta, your oil is at $25 a barrel. It's stuck there because it can't move. You put the Keystone Pipeline in and oil price goes down…”

The Dao of Capital

The subtitle is Austrian Investing in a Distorted World and the author is Mark Spitznagel (2013).

I have had this one sitting around for a little while, having long heard that it is an interesting and unique take on both the Austrian School of Economics and its practical application. And, with that in mind, what I actually took away from the book is that perhaps what I find compelling about the Austrian theory is that there is an obvious transition to a very logical and sound way of investing. At its heart, the Austrian school is all about how market interventions by Central Banks or others that increase the availability of cheap credit lead to distortions that always come back to upend the economy. That is to say, where Keynesians have a view on fiscal and monetary policy to address the bust and hopefully to try and avoid it, invariably the bust comes and the solution usually resembles the initial problem that caused it – suggesting, on some level, a misdiagnosis. In contrast, the Austrians don’t try to paper over the problem, and also offer a compelling tale of why the bust happens. Still, the thing that I never appreciated about the theory, or at least didn’t understand about why I respond so well to it (certainly not until reading this book), is how it marries an economic theory with an investment approach that allows you to profit and still minimize risk. The essence is understanding that good things can take time, and so investing in roundabout production, rather than playing the casino for immediate gratification, is the course. It is about small losses on the way to big wins. A broader depth of field. Ultimately, the Austrians are value investors with an added insight. And who can argue with that.

End of Year Note

I am optimistic about 2017. Not because of who got elected president, or because I think that the economy is about to heat up. Rather, it is about business prospects that I have been mining for several years which I think will finally evolve and mature to my satisfaction. Having lacked such optimism for a while, it’s a nice change.

Apropos of that sentiment, the notion that interest rates should rise will facilitate the ideas that I want to take action on. And, courtesy of 720 Global, I think the following summary explains why such a reality is likely:

“While the increasing interest rate risk and price sensitivity coupled with a decreasing margin of safety (lower coupon payments) of outstanding debt is alarming, the story is incomplete. To fully appreciate the magnitude of this issue, one must overlay those risks with the amount of debt outstanding. Since 1982, the duration (price risk) of nominal U.S. Treasury securities has risen 70% while the average coupon, or margin of safety, has dropped 85%. Meanwhile, the total amount of U.S. public federal debt has exploded higher by 1,600% and total U.S. credit market debt, as last reported by the Federal Reserve in 2015, has increased over 1,000% standing at $63.4 trillion. When contrasted with nominal GDP ($18.6 trillion), one begins to gain a sense for how radically out of balance the accumulation of debt has been relative to the size of the economy required to support and service that debt. In other words, were it not for the steady long-term decline in interest rates, this arrangement likely would have collapsed under its own weight long ago.”

To all, I wish a happy and healthy new year. I look forward to bigger and better things.

Bond Update

The move in interest rates since the election (and really since the low over the summer) has been impressive.  There are a whole host of unintended consequences if rates move higher in a world where the stock market is overvalued, economic growth is tepid, debt is in large supply already, and the spigots of fiscal policy seemed poised to be turned on under Trump.

So, with that as context, I decided to look at the charts to determine whether it is safe to say that the 35-year bull market is over.  Short answer, until the 10-year bond (as proxy for all bonds) cracks north of 3%, then the downtrend in rates remains intact.  With that said, the double bottom (hit almost exactly 4 years apart in 2012 and 2016) speaks to a potential change of course.  But, we must wait for confirmation, especially as there are plenty of smart people that I follow who are making the case for even lower rates when the next recession hits.

Market "Call"

October is a month for stock crashes and downdrafts.  The kindling is now in place for exactly that, and so I believe that we are about to see some serious damage in financial markets this month.  That and a quarter...

Narratives

Ben Hunt:

The only rational owner of a negative rate bond is a pure return seeker; there are zero income seekers holding negative rate bonds. Why is this a problem? Because income seekers will continue to own bonds even if the price goes down (for a while, anyway; at the very least, they are sticky owners). Return seekers, on the other hand, are not sticky owners at all. They will only own a bond if they think that the price is going up — meaning in this case that yields will continue to become even more negative, i.e., that there’s a greater fool (probably in the form of a Central Bank) willing to pay higher and higher prices for these income-destroying bonds — and they will sell in a heartbeat if they think this dynamic is changing.

There is, to cop a phrase from the People’s Bank of China, a massive “one-way bet” on negative rate sovereign debt today. The momentum trade has crystallized to perfection in negative rate bonds, which has grown to become a $10+ trillion (yes, that’s trillion with a T) asset class. I think it’s the most crowded trade in the world from a behavioral or investment DNA perspective, and the moment you get even a whiff of the ECB or BOJ backing down from or reaching its limit of greater foolishness, you are going to get a rush to the exit on ALL sovereign bonds that will shake global capital markets to their core. It’ll be good times till then, as it always is, and I am seeing zero signs of Central Bankers backing down from their greater foolishness. But we have once again set up the global financial system as an inverted pyramid, with a $10 trillion asset class poised on a single, solitary piece of Common Knowledge —– what everyone knows that everyone knows. In 2008, the $10 trillion asset class of residential mortgage backed securities (RMBS) was entirely based on the Common Knowledge that it was impossible to have a nationwide decline in U.S. home prices. When that Narrative failed, the entire inverted pyramid came crashing down. In 2016, the $10 trillion asset class of negative rate sovereign bonds is entirely based on the Common Knowledge that there is no limit to the greater foolishness of Central Banks. If this Narrative fails, the entire inverted pyramid will come crashing down again.

More on Brexit

Ben Hunt:

Brexit is a Bear Stearns moment, not a Lehman moment. That's not to diminish what's happening (markets felt like death in March, 2008), but this isn't the event to make you run for the hills. Why not? Because it doesn't directly crater the global currency system. It's not too big of a shock for the central banks to control. It's not a Humpty Dumpty event, where all the Fed's horses and all the Fed's men can't glue the eggshell back together. But it is an event that forces investors to wake up and prepare their portfolios for the very real systemic risks ahead.

There are two market risks associated with Brexit, just as there were two market risks associated with Bear Stearns.

In the short term, the risk is a liquidity shock, or what's more commonly called a Flash Crash. That could happen today, or it could happen next week if some hedge fund or shadow banking counterparty got totally wrong-footed on this trade and — like Bear Stearns — is taken out into the street and shot in the head.

In the long term, the risk is an acceleration of a Eurozone break-up, which is indeed a Lehman moment (literally, as banks like Deutsche Bank will become both insolvent and illiquid). There are two paths for this. Either you get a bad election/referendum in France (a 2017 event) or you get a currency float in China (an anytime event). Brexit just increased the likelihood of these Humpty Dumpty events by a non-trivial degree.

What's next? From a game theory perspective, the EU and ECB need to crush the UK. It's like the Greek debt negotiations ... it was never about Greece, it was always about sending a signal that dissent and departure will not be tolerated to the countries that matter to the survival of the Eurozone (France, Italy, maybe Spain). Now they (and by "they" I mean the status quo politicians throughout the EU, not just Germany) are going to send that same signal to the same countries by hurting the UK any way they can, creating a Narrative that it's economic death to leave the EU, much less the Eurozone. It's not spite. It's purely rational. It's the smart move.

What's next? Every central bank in the world will step up their direct market interventions, particularly in the FX market, where it's easiest for Plunge Protection Teams to get involved. Every central bank in the world will step up their jawboning and "communication policy" to support financial asset prices and squelch volatility. It wouldn't surprise me a bit if the Fed started talking about a neutral stance, moving away from their avowed tightening bias. As I write this, Fed funds futures are now pricing in a 17% chance of a rate CUT in September. Yow!

What's the result? I think it works for a while, just like it worked in the aftermath of Bear Stearns. By May 2008, credit and equity markets had retraced almost the entire Bear-driven decline. I remember vividly how the Narrative of the day was "systemic risk is off the table." Yeah, well ... we saw how that turned out. Now to be fair, history only rhymes, it doesn't repeat. Maybe this Bear Stearns event isn't followed by a Lehman event. But that's what we should be watching for. That's what we should be preparing our portfolios for.

Brexit

Courtesy of Stratfor & ETM Analytics:

After June 23, Britain will have a definitive answer to the question of whether it will stay in the union. But the outcome of the vote won't change the fact that the British economy is cyclically and structurally fragile. Nor will it solve, by itself, the problems created by a debt super-cycle, zero interest rate policy, regional stagnation and asset market bubble risk. Europe's banking system is frail, Brexit or not.

The vote does, however, affect perception. A Brexit could create sufficient uncertainty to spark panic in financial markets, even though it would be a mere catalyst rather than the ultimate cause. A victory for "remain," on the other hand, could calm the markets. The latter could offer opportunities to position for a bearish phase of the business cycle and for the negative structural consequences of EU entanglement, including having less flexibility to treat Europe's chronic illnesses.

A Brexit would be more difficult to exploit. Do markets panic, or do they wait patiently to watch how leaving the European Union will unfold? The initial reaction, most likely, will be some degree of panic. In one scenario, this panic persists only for a few days or weeks and then settles down as the slow, measured process of a Brexit begins. Politicians convince markets that it will be a gradual, amicable split. There may have to be a series of joint announcements with the European Union assuring that the transition will be slow, steady and tightly controlled. If panic persists for more than a few days or weeks, however, and if political assurances are unconvincing, then it could begin to expose British (and European) macro fragility rather quickly. The especially destabilizing factor to watch here is that as business cycle risk emerges, markets correct lower and growth slows, so a Brexit would be in line for receiving the bulk of the blame. That could spark further rounds of Brexit panic, causing something of a vicious cycle that precipitates a recession and credit crunch.

Such a recession would be the inevitable cyclical outcome hastened by a Brexit, rather than a fundamental consequence of it. The strategic opportunity here is a long-term one. There is a significant chance that Britain Inc. gets oversold. If the country can move toward sensible economic and financial sector reforms and retain an open, smart immigration policy, it could present attractive re-entry opportunities for investors, especially as a relative play to the medium- and long-term dysfunction expected to prevail in the European Union and eurozone.

Despite the narrative in the mainstream media, a Brexit may not fundamentally hurt the British economy. On the contrary, it offers a medium- to long-term call option on greater economic dynamism and a more efficient and autonomous crisis response mechanism. Also lost in the Brexit noise are the macroeconomic problems Britain faces regardless of the referendum.

Housing

Mark Hanson on the housing market:

”The only difference between leverage in finance and cheap and easy credit and liquidity in bubble 1.0 and 2.0 is that Wall St investors and banks quietly pushed effective rates to the 2’s back then and the Fed took over the job, overtly, this time around.”

and

“If 2006 was a known bubble with housing prices at “X”, affordability never better, easy availability of credit, unemployment in the 4%’s, total workforce at record highs, and growing wages, then what do you call today with house prices at X+ 5% to 20%, worse affordability and credit, higher unemployment, weakening total workforce, and shrinking wages? Whatever you call it, it’s a greater thing than “X”.”

What the end looks like...

In the context of the typical question "How can the Fed ever lose control of the bond market, since they can always print more money?", today's Ask Fleck had a submission that probably spells out the answer...

Specifically, there is a quote in the most recent Barron's from Bill Gross:

"Years of easing by central banks mean that interest rates in most of the developed world will fluctuate narrowly. That offers an opportunity to sell volatility to create return. If you bought a 10-year Treasury bond today and nothing changed, you would get a 1.9% yield. If you bought a seven-year German Bund, you’d get zero. If, however, you sold a three-month call or three-month put on that same Treasury with a 20-basis-point [hundredths of a percentage point] variation—in other words, the yield stayed in the range of 1.7%-2.1% for three months—the trade would produce an annual return of 6%, as opposed to 1.9%.

The risk is that interest rates will go up or down by more than 20 basis points over a three-month period. But my premise is that central bankers will do anything possible to contain interest-rate fluctuations. The sale of volatility is producing the predominant amount of return in my fund."

The reader goes on to suggest (reasonably) that if Gross is pursuing this strategy, then plenty of other money managers are as well.  Which leads to his pertinent insight:

"You've been asked over the years how the fed could ever not control the outcome in the bond market (in so many words). After all, can't they just print money and buy bonds? Well, trillions upon trillions of notional bond money, leveraged and selling volatility on top of it? That's how - they will be totally overcome when the time comes as these managers are forced to deal with portfolio problems all at the same time. Again, it's not today's business, treasury bond yield will likely move lower, perhaps much lower, during a nasty equity bear market (see Europe and Japan). But that would likely reinforce this behavior in the bond market of selling vol on leverage. If ever there were a coiled spring the Fed would be unable to deal with this is it..."

Silly Trade Idea of the Day

Depending on who you think will win the fight this weekend, get long or short the Filipino bourse into the Monday trading day.

FX Trades

I don’t pay as much attention to the markets these days – but when I do, my focus is primarily on rates, forex and gold. Today we’ll hit on some currencies because they present interesting trades on a regular basis, with the ability to use options on ETFs in order to implement ideas and manage risk.

First up is the Euro. I saw this article about how Draghi and ECB members are getting worried about deflation, with the single currency getting stronger against the US Dollar. Arguably the ECB has been the least aggressive in its monetary policy and, as a result, the Euro is up near 1.40 (after being as low as 1.275 last August). Which is why I fully expect some action in the next few months, consistent with the piece from Bloomberg. And why I think it is time to get positioned with some puts on the FXE.

Next is the Yen. I posted a few weeks ago about a cup-and-handle in the chart, foretelling Yen weakness ahead. Given the difficulties that Abenomics has had in achieving its goal. I fully anticipate more JGB purchases by the BOJ. Even the chart suggests that the Yen is at support levels and unlikely to get much stronger from here. My play is to purchase puts on the FXY.

Clearly both trades would suggest dollar strength ahead. And while the Dollar Index has been getting hammered lately, it’s approaching levels that have functioned as support in the past.

Odds & Ends

-Albert Edwards (h/t Zero Hedge):

“…a recession seems a distant prospect in the minds of most investors. Yet one key precursor for a recession has now fallen into place. Slowing productivity growth means that unit labour costs are now running well ahead of output price inflation. This means a margin and profits downturn is now about to unfold. That typically is a key precursor of recession.”

“That confidence in a long cycle comes partly with a high level of certainty that the monetary authorities remain in control of the economic cycle. The doomsayers who predicted that this recovery was on the verge of faltering have been proved wrong, and like the boy who cried wolf, can be safely ignored by the market. Yet that is exactly what happened in 2006 with the US consumer and housing boom, where the voices of caution had been so wrong, for so long, that their Cassandra-like utterances were ignored. Cassandra’s forecasts may have been ignored, but they proved to be correct. Investors demand a sign of when to get out and that trigger may have just arrived.”

-Exhibit A for why banks continue to be black boxes and there is no way to feel comfortable about their balance sheets and respective valuations.

-Given my views on Japan, this article demands further research.

-Over the holiday weekend I spent time with family and friends at different gatherings. In that setting, I have always seen myself an outlier in terms of political and economic views. And in talking about both this past weekend, nothing has changed. What is also abundantly clear, though, is that most of these people (and bear in mind that I care about them) take their views from the mainstream media, and only seem capable of regurgitating the usual recycled talking points. Beit the healthcare law, Iran or the state of the U.S. economy. The contrarian voice holds few in its ranks, and a great many have capitulated to the majority. I see it in the newsletters that I read, and it is definitely prevalent in the people that I interact with. All of which is to say, be mindful when everyone is on the same side of the trade…